Singapore Property & REIT Sector 2018 Strategy - UOB Kay Hian 2017-12-01: Riding The Wave

Singapore Property & REIT Sector 2018 Strategy - UOB Kay Hian 2017-12-01: Riding The Wave Property Developer Stocks Outlook Singapore REITs Outlook Market Strategy 2018 ASCENDAS REAL ESTATE INV TRUST A17U.SI CAPITALAND COMMERCIAL TRUST C61U.SI CDL HOSPITALITY TRUSTS J85.SI CITY DEVELOPMENTS LIMITED C09.SI WING TAI HLDGS LTD W05.SI

Singapore Property & REIT Sector 2018 Strategy - Riding The Wave

  • Maintain OVERWEIGHT on property and REITs, preferring stocks with exposure to the residential, hotel and office segments which are expected to outperform as we head deeper into the upcycle. 
  • We are cautious on retail and industrial factory and warehouse spaces. 
  • City Developments, Wing Tai, CDREIT, CCT and AREIT are our top picks.



  • We recommend an OVERWEIGHT stance on the sector, preferring stocks with exposure to the residential, hotel and office segments which are expected to outperform as we head deeper into the up-cycle. We are cautious on retail and industrial factory and warehouse spaces. City Developments, Wing Tai, CDREIT, CCT and AREIT are our top picks.
  • We have raised target prices for property and REITs by 0-23% and upgrade City Developments and CDREIT to BUYs on the back of the strong economic recovery. This reflects the UOB Global Economics and Markets’ 90bp upward revision of 2017’s GDP growth target to 3.3% and 2018 growth forecast to 2.5%. The Ministry of Trade and Industry (MTI) is similarly upbeat, with a 50bp upward revision to 3.5% in their forecast for 2017 GDP growth and 2018 GDP growth forecast to 1.5-3.5%.
  • Concerns over interest rate hikes are unwarranted. Past cycles have demonstrated that sharp rate hikes are contingent on a strong economic recovery and heightened expectations of inflation. REITs are able to transform into growth vehicles in an inflationary interest rate environment, contrary to the conventional inverse relationship between dividend yields and interest rates. The direct impact of higher interest rates is low for developers as interest accounts for a minority of overall development costs. The TDSR framework provides safeguards against the indirect affordability impact.

PROPERTY DEVELOPERS: Analysis of peak and trough P/B valuations still implies an attractive 4:1 reward-to-risk proposition. 

  • Despite the strong performance this year, developers currently trade at 20-40% discounts to RNAV (0.5SD below mean discount of 15.6%). In past up-cycles in 1999, 2007 and 2010, developers have traded at 3.5SD, 1.7SD, and 0.8SD above means respectively. Analysis of peak and trough P/B valuations implies an upside potential of 170% and downside risk of 43%. 
  • We expect Singapore property prices to rise by 5-10% next year and the nascent recovery to spread to the mid- to high-end segments in the next wave, driven by replacement demand from en-blocers and a pick-up in the foreign home-buying interest. 
  • City Developments and Wing Tai are our top picks.

REITS: Transition to growth vehicles will continue to see yield compression

  • Transition to growth vehicles will continue to see yield compression, especially in the light of encouraging US and Singapore economic data. Despite the prospects of a rate hike in June, the market could likely view REITs as growth vehicles (instead of the more conventional yield play) and we opine that REITs could continue to be an attractive asset class. 
  • Yield compression to 1SD below up-cycle average of 2% still implies over 30% upside potential for REITs. We prefer REITs with exposure to the hotel, office and business park segments with CDREIT, CCT and AREIT as top picks.

Hospitality to shine in 2018. 

  • Room rates are poised to recover on the back of higher occupancies, driven by a recovery in corporate travel and Chinese visitor growth, amid a tight supply pipeline. We anticipate recovery in corporate travel from a low base (which softened in recent years, due to shrinking corporate budgets amid weak economic activity). The benefit to hoteliers in Singapore will be disproportionate, given Singapore’s role as a regional meetings, incentive travel, conventions and exhibitions (MICE) hub.
  • Hotel room supply is limited beyond 2017, as no hotel sites have been introduced in the government land sale (GLS) programme since 2014. Additionally, the URA has tightened approval for applications on new hotels, backpackers’ hostels and boarding houses on sites not zoned for hotel use. Compared to a net increase of 1,532 rooms in 4Q17, the number of rooms set to come on stream is at only 1,139, 1,465, and 392 in 2018, 2019, and 2020 respectively. Of the incoming supply, about 63% is located in the city centre, 18.5% outside the city centre and the remaining 18.5% on Sentosa.
  • RevPAR to turn around, rising 3-5% p.a. over the next three years, driven by a pickup in room rates as occupancy inches towards 90%. Visitor arrivals have surged 4% yoy in 8M17, setting path for 2017 to exceed the 2016’s historic high (16.6m).

Office: Cyclical recovery underway.

  • Grade A Core CBD rents rose 1.7% qoq (the first increase in 10 quarters). URA data tracking office rentals similarly showed positive increases, with qoq growth spread across the central region (2.6%), central area (2.4%) and fringe area (2.2%).
  • On the back of stronger economic results and tightened office supply. The outlook for the office segment has distinctively improved, evidenced by higher optimism shown by firms. A net weighted balance of 9% of firms (surveyed by the EDB) in 3Q17 are expecting more favourable business conditions from Oct 17 to Mar 18. The positives sentiment has translated into a pick-up in leasing momentum (with Marina One and UIC Building reaching pre-commitments at approximately 70%). 
  • Beyond 2017, upcoming supply is more limited, especially in core CBD area (with less than 0.81m sf p.a. in the next three years). Confidence in the office market is further evidenced by the increase in development activity, such as the strong participation in bids for commercial land tender at Beach Road.

Residential: Buoyed by replacement demand from en-blocers, foreigners’ home-buying interest and shrinking household sizes. 

  • Collective sales transacted in 11M17 topped S$6.4b, but only made up 38% of the cumulative sales transacted in 2006/7, suggesting further runway. The 2006/7 en-bloc sales cycle took out some 10,000 units and minted a similar number of millionaires seeking replacement properties. We see a similar wealth effect for the around 3,100 units taken out so far in 2016/17. 
  • The recovery is further supported by a return of foreign buyers, due to the leveling of playing field with overseas regimes following suit to implement harsh cooling measures.
  • We expect property prices to rise by 5-10% yoy in 2018 after bottoming out this year, with nascent recovery spreading to the mid- and high-end segments in the next wave. Assuming muted residential demand of about 8,200 units p.a. from 2017 to 2020 and conservative population growth at a 1.2% CAGR, we expect overall private housing vacancy to improve from 8.1% in 2017 to 5.9% in 2020 - underpinned by tapering private residential supply. ( < 8,696 units pa in next three years).

Industrial: Bright spots in business park and high-tech segment. 

  • Rents for business parks in the city fringe submarket increased 0.9% qoq to $5.55 psf/mth, according to CBRE. The high-tech sector enjoyed increased leasing enquiries for space supported by advanced electronics and consumer product players. With the strengthening office rental market, business parks will benefit from spillover office demand. 
  • Higher quality and better-located business parks have also proved to be able to attract tenants without over-compromising on rents, while business parks of lower quality generally continue to struggle with attracting and retaining tenants, and may face further pressure on occupancies and rentals. 
  • Factory rents declined 1.2-1.6% qoq, while warehouse rents fell 0.6-0.8% qoq, according to CBRE as market absorbs a larger upcoming supply of new space. 

Retail: Remains challenged. 

  • 3Q17 saw retail rental in Orchard Road remaining flat qoq and declining by 3.2% yoy, as the leasing environment remains challenged with landlords becoming less selective in their tenant profile and providing concessions (like longer fit out periods to attract tenants). 
  • Pockets of weakness still prevail in the retail segment, due to increased mall supply, leakages from residents who travel and spend abroad, higher operating costs and structural threats posed by e-commerce. We expect muted rental growth of 0-3%. 
  • Acquisitions and asset enhancement initiatives (AEI) are expected to continue catalysing growth (ie CMT: Funan, FCT: Northpoint, Starhill: Plaza Arcade, Suntec: Park Mall). 

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-01
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